Milwaukee church loses bid to shield $55 million from creditors

A federal appeals court in Chicago said the bankrupt Archdiocese of Milwaukee can't defend the transfer of $55 million into a cemetery trust by invoking a 1993 religious-freedom statute.

(Bloomberg) — A federal appeals court said the bankrupt Archdiocese of Milwaukee can’t defend the transfer of $55 million into a cemetery trust by invoking a 1993 religious- freedom statute.

The Milwaukee church filed for reorganization in June 2011 to resolve claims of clergy sexual abuse. The largest single potential asset for victims was the $55 million, which was moved to the cemetery trust before the bankruptcy filing.

An official creditors’ committee representing abuse victims sued to recover the money, saying it was improperly transferred. The bankruptcy judge let the case proceed, but U.S. District Judge Rudolph T. Randa stopped it in July 2013, concluding that the trust was exempted from creditor claims by the 1993 Religious Freedom Restoration Act, or RFRA.

The creditors appealed.

A three-judge panel of the Chicago-based U.S. Court of Appeals handed down a 38-page opinion Monday reinstating the suit. U.S. Circuit Judge Ann Claire Williams, writing for the panel, disagreed with Randa on virtually every point.

In light of the “plain language” of the statute and legislative history, RFRA is only applicable when the government is a party, Williams said, adding that three other appellate courts have concluded the same. Williams said the creditor committee wasn’t the government and wasn’t acting under “color of law.” Its duties are only to creditors, she said.

'CORE FUNCTION'

Although some of committee’s actions are subject to government and court supervision, its “core function” is to “advance the undivided interest of its clients,” she said.

She also said the constitutional right to free exercise of religion can’t by itself bar the suit because so-called fraudulent-transfer provisions in bankruptcy law are “neutrally applicable and represent a compelling government interest.”

Those provisions apply equally to a church, synagogue, deli or bank, according to the opinion.

To the extent the lawsuit placed any burden on the church, it was overcome by a compelling government interest, the appellate judge said. There can be no “religious exception that would allow a fraudulent conveyance in the name of free exercise” of religion, Williams wrote.

The appeals court didn’t reach the question of whether moving the $55 million was, in fact, a fraudulent transfer. That’s to be decided in bankruptcy court.

Timothy Nixon, a lawyer for the cemeteries, said in an e- mailed statement that the decision “casts a shadow over religious freedom.” Without saying whether he would attempt an appeal to the U.S. Supreme Court, Nixon said he would “discuss all options with our client.”

ON HOLD

The bankruptcy judge had put the church’s Chapter 11 plan on hold until the appeals court made its decision. Had it won, the archdiocese intended to proceed with a plan that only offered abuse victims about $4 million. Now it faces a longer path out of bankruptcy.

Because the panel reinstated the suit in bankruptcy court, Williams didn’t rule directly on whether Randa should have sent the case to another district judge, as the creditors had requested. The appellate panel did suggest that he should have recused himself because his parents and other close family members are buried in the cemeteries at issue.

A “reasonable person might wonder whether the impartiality of a judge” could be impaired if the graves of nine close relatives might be affected by the outcome of the suit, Williams wrote.

To read about arguments before the appeals court, click here for the June 3 Bloomberg bankruptcy report. For Randa’s decision, click here for the Aug. 1, 2013, report.

When the Milwaukee diocese filed for bankruptcy it was the eighth to seek bankruptcy protection from sexual-abuse claims. The church listed assets of $98.4 million and liabilities of $35.3 million.